Mortgage Choice’s CEO told an Asic hearing on responsible lending about one third of home loan lenders don’t check commitments outside their institution.
Photograph: Lukas Coch/AAP

A new financial complaints authority is investigating whether there are widespread problems with the way banks lend people after receiving complaints including allegations that documents have been falsified, a public hearing has been told.

The inquiry, conducted by the Australian Securities and Investments Commission, also heard that about a third of lenders are not verifying what debts borrowers owe to other financial institutions and that banks continue to rely on a benchmark that came under heavy fire at last year’s financial services royal commission when deciding whether to make a loan.

It has also emerged that the National Australia Bank changed its lending procedures to try to better capture spending not included in the controversial benchmark, known as the Household Expenditure Measure, just a fortnight ago.

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The public hearings, the first held by the Australian Securities and Investments Commission in its 20-year history, also heard criticism by consumer groups of a court ruling last week that threw out a lawsuit the regulator brought against Westpac accusing it of lending irresponsibly to more than 250,000 customers.

The federal court judge Nye Perram ignited consumer group anger by saying that borrowers could reduce their expenses after taking out a loan, for example by ditching Wagyu beef and “the finest shiraz” in favour of “much more modest fare”.

Asic is holding the hearings to help it decide how to change guidance on responsible lending standards that was last updated in 2014.

Hearings have also focused on the use of a benchmark called the household expenditure measure, which was criticised during last year’s banking royal commission for setting too low a bar.

Perram last week played down the importance of the Hem, saying Westpac had instead taken account of the actual expenses run up by borrowers.

However, large mortgage broker, AFG, told Wednesday’s hearings that about 50% of loan applications it processed declared expenses below the Hem – even though the benchmark excludes common costs such as housing, school fees and superannuation contributions.

“It’s a number we’re working with our brokers to improve,” Mark Hewitt, a general manager at AFG, told the hearing.

ANZ told the inquiry its ratio was even higher, at 57%.

“We are continuing to work to bring that number down through a range of measures,” the bank’s managing director of consumer banking, Karen Gibson, said.

NAB said only about 33% of loan applications declared expenses below the Hem.

But the bank’s executive general manager responsible for looking after mortgage brokers, Anthony Waldron, admitted the bank had only recently added six categories of spending to its loan questionnaire, on top of the 10 contained in the Hem.

Under pressure from the Asic commissioners running the hearing, Sean Hughes and Karen Chester, Waldron admitted the bank was previously “trying to shoehorn them in” to the existing 10 categories.

A NAB spokeswoman said the change was made two weeks ago.

Susan Mitchell, the chief executive of one of Australia’s biggest mortgage brokers, Mortgage Choice, said: “We have about one third of our lender panel who do not require verification of commitments outside their institution.”

David Lock, the chief executive of the Australian Financial Complaints Authority, which was set up about nine months ago to take over hearing customer disputes with banks, said there were “real problems” with responsible lending.

“It can have a catastrophic impact on consumers and their lives can be destroyed.

The authority’s lead ombudsman for banking Evelyn Halls said it was investigating whether there were problems across the industry after receiving complaints about topics including whether the financial circumstances of borrowers had been properly investigated and allegations mortgage brokers failed to declare their commissions or forged paperwork.

Gemma Mitchell, the managing solicitor at Western Australia’s Consumer Credit Legal Service, said the distinction between essential and discretionary or luxury expenditure was meaningless for her clients, some of whom were suffering from drug or gambling addictions.

“They’ve already cut back as far as they can,” she said. She said one client even cut back on food to try to meet his repayments. “He’s become ill because he because he’s not eating properly.”

She admitted going through bank accounts to verify living expenses was time-consuming, but said that if an under-resourced legal centre could do it, so could a bank. “The payday lender transactions pop out, the gambling transactions pop out,” she said.

Gerard Brody, the chief executive of the Consumer Action Law Centre, said Asic’s new guidance “should be based on what the law actually says”.

He said automated approaches and tick-a-box forms didn’t get enough information from borrowers to comply with the law. “It’s important to look at overall expenses and look at incomings and outgoings,” he said.

“This was a test case for Asic and it is important that we bring such cases,” he said. “We are carefully considering the decision and its impact more generally on responsible lending.”